- 05 January 2006 -
2006 Shaping Up as a Good Year for Industry
By Greg Valero, g.valero@elsevier.com

Our annual "Review and Forecast" story provides a snap shot of major issues that affected the surface finishing industry last year and offers predictions for 2006. Many of the factors that impacted business in 2005—such as regulatory compliance, foreign competition, rising energy and raw material prices—are expected to carry over into the New Year. What we found is surface finishing is experiencing many of the same challenges and issues as other U.S. industries.

2006 didn't exactly start off on the right foot after the U.S. dollar fell to a two-week low of $1.196 against the euro, following a report that U.S. manufacturing expanded at a lackluster pace last month. The Institute for Supply management's factory index fell from 58.1 in November to 54.2 in December, the sharpest decline since July 2002 (readings above 50 indicate growth). U.S. manufacturing growth slowed in December after expanding at the fastest pace of the year in the months following the Gulf Coast hurricanes.

But the news is not all bad, as several key economic indicators point in the right direction. For example, U.S. manufacturing was robust in 2005, suggesting production will keep expanding this year to fill orders and rebuild inventories, according to published reports. Inventory restocking and rebuilding after Hurricane Katrina are reportedly supporting factory expansion at a faster pace than earlier in 2005. Economists expect resilient consumer demand and business investment in equipment to help support manufacturing growth in 2006.

Oil prices have receded since October, helping ease concern about inflation as well as questions over whether companies have the wherewithal to spend on equipment and employment. The U.S. probably added 200,000 in December, analysts say, following a month when the unemployment rate was stable at 5% (when the U.S. was coping with the fallout from three hurricanes). Orders for durable goods rose 4.4% in November, led by a surge in demand for aircraft.

Last month, copper prices fell after inventories in warehouses monitored by the London Metal Exchange (LME) posted their biggest gain in four months. Inventories rose 7,150 metric tons, or 8.9 percent, to 87,750 tons, the highest since October 2004, LME reports. Inventory movements also influenced nickel, which lost some of its previous gains. Zinc and tin prices also dropped, although aluminum bucked the trend, rising to $2,280 a metric ton. Meanwhile, precious metals such as silver, platinum, and palladium saw prices decline after easing with weaker gold prices.

One of the biggest pieces of good news for the metal finishing industry is the prediction that capital investment will kick in and supplant housing as a major prop supporting the U.S. economy. An expected upturn in this spending has raised expectations that corporate America has finally begun to replace aging and outdated equipment, drawing on higher-than-expected profits to do so. The longer the recovery keeps going, the more confident businesses—surface finishers in particular—will become in investing in their operations.